Advance pricing agreement
An advance pricing agreement is a deal struck with one or more tax authorities that fixes an accepted transfer-pricing method and rate for a company's future intra-group transactions, reducing audit and double-taxation risk.
FrameworkOECD Transfer Pricing Guidelines
See it move
A manufacturing subsidiary negotiates a bilateral advance pricing agreement fixing its related distributor's margin at 6% of resale price. On €4,000,000 of resale revenue, the distributor's permitted margin is €240,000, so the manufacturer's supply price under the agreement is €3,760,000. Both tax authorities have pre-committed to accept this figure, removing the need to relitigate pricing during a routine audit.
Check yourself
A distributor operates under a bilateral advance pricing agreement that fixes its gross margin at 8% of resale price. In a year with resale revenue of €2,500,000, what transfer price should the related manufacturer charge, under the terms of the agreement?